Division Head: Timur Kurbanov (NYU Shanghai), Co-Head: Charlie Solnik (California Polytechnic State University); Analysts: Martin Dai (Western University), Jennifer Liu (McGill University)
Click on the image to read the full report.
2020 has been a challenging year for every APAC country and we have observed different reactions taken by different economies. Specifically, we will discuss three major events that reflect the underlying changes in the economic environment and analyze their implication on the M&A landscape.
Navigating the Pandemic
While the unexpected pandemic swept and heavily hit almost every APAC country in H1 2020, most of them have been picking up since July at multiple speeds. Overall, we saw a faster recovery in advanced economies than emerging and developing countries excluding China. This observation corresponds to different labor market structures of two country groups. Many developing countries in APAC rely on industries that largely involve in contact-intensive activities, and the pandemic puts them in a dilemma to balance between infection rates and economic growth. Zooming into Southeast Asia countries, Malaysia, Indonesia, and Philippines have remarkably higher cases per million than other APAC countries, though their rates are still below the world average. With higher infection rates, these countries were forced to extend lockdown, which further hurt the economic recovery.
Returning to full capacity will be a long slog. The strong rebound in IPO activities since Q3 2020 does not tell the whole story since most deals clustered in the technology sector. While mega deals may remain unaffected, small potential IPOs or M&A are vulnerable to consequences of the pandemic, including worsen credit risks, bankruptcy, and cash shortage. These issues are more serious to businesses highly engaging with in-person contact, which corresponds to the credit rating downgrading and quiet transaction environments in the APAC consumer staples sector.
Rising US-China Political Tensions and Trade Dispute
US-China political tensions since the start of this year cast a shadow over business activities between two countries. Capital flows hit the lowest level since 2011 and US investment in China fell 31% compared to 2019. The enactment of the Holding Foreign Companies Accountable Act urged many existing and potential US-listed Chinese state-owned companies to turn to dual-listing. Therefore, we are likely to see more IPOs activities in Hong Kong and Shanghai Stock Exchange, which has been proved by Q3 APAC IPO activity data. At the same time, the US is worried about the risk of excess dependence on China and encouraging supply chains to shift back to the US. Other Asia Pacific countries with the same concern also took action to achieve supply chain resilience. Although few details were released, there is a strong sign that current trade relationships are no longer stable. Despite political tensions and unfavourable policies, China continues to encourage inbound investment from US companies, and many US companies recognize the emerging market in China.
Accelerated Inequality and Social Unrest
Besides disrupting economic growth, COVID-19 has intensified inequality, worsening the situation for countries with high-income inequality. The pandemic forced businesses to introduce or speed up automation and robotization, which raised concerns of manufacturing job losses. Job losses are concentrated in industries with lower wages, which also usually require a high level of in-person activity involvement and thus put workers in a riskier environment. However, people with lower wages would have difficulty in receiving testing and proper medical care if they were infected. Governments implemented different fiscal policies to support the most vulnerable groups according to the condition of each country. However, the issue of increasing inequality remains on the table and will affect how investors value a business. We believe accelerated inequality contributes to increasing attention to ESG investing. That being said, dealmakers will possibly put more weight on ESG criteria and a candidate with positive ESG characteristics is more likely to be valued higher.
Capital Markets Overview
As more APAC countries recovered from COVID-19, we observed a strong rebound in debt and equity capital market activities. Highlighted trends include increasing attention on ESG investing, the prosperous video gaming industry during the pandemic, regulatory landscape for Chinese IPOs, and so on. In this sector, we will look at four deals, analyze their potential impacts, and where the APAC capital market is heading to.
MHI Ltd. Issues their First Corporate Green Bond of 25 Billion JPY
With COVID-19 bringing vast uncertainties and implications to the economy, the debt capital markets have become key sources of funding for many organizations within the APAC region in 2020. One of the key trends within the bond markets is the continuing prominence of green bond issuances in correlation to an increased focus on addressing environmental concerns. Although green bond issues reached its lowest point in over three years during Q2 of 2020 due to a temporary shift of new debt towards social bonds supporting the downturns caused by the pandemic, green bond issuance is expected to rebound and continue its pre-COVID surge through a long-term outlook. The growing trend of focusing on sustainability is evident within the industrial industry where the company, Mitsubishi Heavy Industries (MHI), engaged in raising funds to decarbonize the world and achieve SDGs near the latter of 2020.
MHI is a core company of the Mitsubishi Group that is headquartered in Tokyo, Japan and focuses its operations on engineering, electrical, and automation applications. The company issued unsecured corporate green bonds on November 24, 2020 worth 25 billion JPY with an interest rate of 0.14% and redemption date close to five years. The green bond structuring agent of this issuance was Mitsubishi UFJ Morgan Stanley Securities Co., Ltd and the purpose of the proceeds raised from the bonds were to assist renewable and clean energy businesses, as well as, the company’s green projects in geothermal, wind, and hydrogen power systems. The bond was given a generally strong credit rating of AA- by the Japan Credit Rating Agency, mainly attributable by the YTM, interest rate on the bond, and the company’s ability to cover financial obligations.
Macroeconomic Trends Analysis
Many companies within the industrial industry in the APAC region are facing disruptions in their businesses led by significant developments in technology. Countries like China are expected to have 4.1 industrial IoT connections by the year of 2025 and APAC smart factories are expected to increase by 10.7% over a timeframe of 2020-2026. With technological advancements being a factor in consideration, many companies have felt the need to accommodate towards more sustainable environmental practices.
Green bonds have supplied this growing desire by offering opportunities for finances to be raised directly towards environmental objectives. While green bonds sales fell by $16 billion in the APAC region during 2020 due to significant rises in social and sustainable bond issuings directed towards the pandemic, they still show strong promises of surging once again in 2021 and onwards. With prior evidence of continuing growth in green bond issuings from 2016-2019 and pledges by some of the world’s largest economies including China and Japan to strive towards becoming carbon neutral, the outlook for prospects seems solid in this area.
MHI’s unsecured corporate green bonds comes after multiple initiatives conducted by the company to direct its operations in a more sustainable direction, such as through a partnership in October 2020 with Vestas Wind Systems, a leader in onshore wind. With growing attention directed towards sustainability, MHI’s debt issuance furthermore provides investors with an opportunity to support ESG-related processes and take on a safe investment option that comes with relatively low risk and volatility.
Tencent raises $6 billion in corporate debt
Despite the numerous implications and losses brought by COVID within the past year, one industry that has boomed during the pandemic is the video gaming industry. With legal restrictions enforced by governments to reduce social interactions, the usage of digital applications by individuals, specifically gaming has increased exponentially to fill in for this void. The pronounced effects of this trend can be evident through Chinese gaming and social media giant, Tencent Holdings Ltd. The company was able to benefit through its gaming services, which contributed heavily towards a posted profit of 29 billion RMB in Q1 of 2020, exceeding the predictions from analysts by approximately 7 billion RMB. Moving forward, Tencent followed up with one of the largest debt deals by an Asian corporation in 2020, issuing $6 billion USD of corporate debt in the month of May
Tencent Holdings Ltd. is a multinational internet conglomerate headquartered in Shenzhen, China that segments its main business operations into social media, online advertising, online gaming, fintech, as well as cloud and digital services. In late May of 2020, Tencent was able to successfully raise $6 billion USD from $1 million in 5 year-debt, $2.25 billion in 10 year-debt, $2 billion in 30-year debt, and $750 million in 40-year debt. The rationale behind this corporate debt issuance comes after Tencent's decision to step foot into the bond market for refinancing and to further bolster their balance sheet in response to the widespread economic downturns caused by COVID.
Macroeconomic Trends Analysis
As aforementioned, many industries were adversely impacted by the pandemic, video gaming was one of the rare industries that benefited significantly during this unprecedented time. Within a country like China, stay-at-home and lockdown measures that started in January 2020 lead towards a 30% increase in average daily mobile usage in comparison to 2019 and a 300% increase in gaming sessions across the timeframe of December 2019 to March 2020. The prominence of video games has been evident in the APAC region which accounted for close to 48% of the global gaming market revenue in 2020.
The underlying trend of the increased engagement in international bond markets by investment-grade companies like Tencent has also been clearly evident, as the demand for higher-yielding securities by investors has allowed corporate borrowers to enjoy more favourable rates. To put this into a numbers perspective, issuers during 2020 in Asia excluding Japan sold more than $354 billion in dollar bonds, up 13% from the previous year of 2019.
International Corp Goes Public within Mainland China
APAC Q3 2020 IPO activity has beaten Q3 2019 by volume (71%) and proceeds (115%). Technology companies remain the most active players in the IPO market where Greater China dominates by deal numbers and proceeds. Increasing US-China trade tensions severely restrict Chinese tech companies’ activities in the US equity market. The unfavourable regulatory environment and increasing market volatilities forced more Chinese technology IPO candidates to turn to domestic markets where the Chinese government continues to release positive policies and strong IPO pipelines. Semiconductor Manufacturing International Corp (SMIC) going public, along with other Greater China issuers, set 2020 to be a record year in terms of IPO activities in China.
SMIC is a partially state-owned global chipmaker that provides integrated circuit foundry and technology services including testing, development, design, manufacturing, packaging, and sale of integrated circuits. SMIC went public on Shanghai’s Nasdaq-style STAR market on July 16, 2020. The company plans to raise 53.2 billion Yuan by issuing 1.9 billion shares at a target price of 27.46 Yuan (US$3.92) per share. Noticeably, SMIC’s listing application was approved within 18 days, which usually takes months to process. SMIC claimed that capital raised in the IPO would be primarily used to build plants and replenish operating capital. Popular views interpreted SMIC’s IPO amid US restrictions on Chinese tech firms as a big step to becoming more self-dependent in chip-manufacturing.
Macroeconomic Trends Analysis
Tech companies were less affected by COVID-19 and showed robust growth in IPO activities in 2020. A large number of Chinese tech firms shifting to domestic listing reshaped the IPO landscape in APAC markets. The Holding Foreign Companies Accountable Act, which was enacted on December 18, 2020, requires companies publicly listed on stock exchanges in the US to declare they are not owned or controlled by any foreign government. However, as China tries to become more technologically independent, Chinese government is likely to gain some control of industry leaders such as SMIC. Conflicting interests will naturally restrict Chinese semiconductors from going US-listing. Since 2019, we have seen a rising number of Chinese semiconductor firms listing in Shanghai exchange.
SMIC going public sent investors a signal of China’s push to greater technological independence. With government ongoing support, investors are developing optimism towards China’s resilience of turmoil from US regulations. Public attention on this mainland China’s biggest listing in a decade is a double-edge sword. If SMIC successfully develops a first-class chip fab, the market will react positively to SMIC’s stock price, bringing sustained capital and encouraging more follower firms to go public. If SMIC fails to meet the expectation, loss of confidence may spread from this industry leader to a broader range.
Yum China Raised $2.2 Billion in Hong Kong Secondary Listing
As political tensions between US and China spread turmoil from the technology sector to other industries, an increasing number of existing US-listed Chinese companies are seeking dual-listing opportunities to mitigate potential regulatory risks. The timing coincidence between the enactment of the Holding Foreign Companies Accountable Act and the delisting of Luckin Coffee, a Chinese coffee chain caught in financial scandals, from Nasdaq brought more uncertainty to the future of existing US-listing Chinese companies. Yum China’s dual-listing represents a popular movement that many existing or expected US-listed Chinese companies will choose in 2021.
Headquartered in Shanghai, Yum China Holdings Inc (NYSE: YUMC) is a fast-food restaurant company operating internationally. Yum China was first listed on the New York Stock Exchange (“NYSE”) on November 1 in 2016. The company announced the issuance of 41,910,700 new shares with an offer price of HK$412.00 (US$53.16) per share on the Stock Exchange of Hong Kong Limited (“SEHK”). Yum China plans to use capital raised from this offering to expand its business network, invest in digitalization, supply chain, food innovation, and value proposition.
Macroeconomic Trends & Impact Analysis
Prior to the COVID-19 pandemic, consumer products companies had been heavily invested in digitalization and supply chain agility. The pandemic swpet the consumer discrationay sector with plummeting demands and in-store dining restrictions. Yum China suffered from a significant decline in revenues in Q1 (23.9%) and Q2 (10.5%) 2020 compared to the same period in 2019. Many small consumer products businesses didn’t survive through the pandemic because of the deleption of free cash flows. Although supply chains of most consumer products companies are expected to return to the pre-covid level at the end of 2020, industry players are worried about a second wave of the coronavirus. Another accelerating trend is digitalization. While in-store dining demands during the pandemic fell greatly, remaining demands were shifted online, which boosted pick-up and delivery services.
As one of the largest fast-food chain companies, Yum China realized the importance of improving its capital base to boost liquidity in case of coronavirus-like situations in the future. If Yum China properly allocates net proceeds from the offering and effectively improves its business model, it will maintain a strong moat and competitive advantages in convenient digital services. On the regulatory side, SEHK listing will help hedge the regulatory risk of NYSE listing if political tensions between US and China continue to intensify.
Read the full report here.